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Switching Costs and Equilibrium Prices

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  • Luis Cabral
Abstract
In a competitive environment, switching costs have two effects. First, they increase the market power of a seller with locked-in customers. Second, they increase competition for new customers. I provide conditions under which switching costs decrease or increase equilibrium prices. Taken together, the suggest that, if markets are very competitive to begin with, then switching costs make them even more competitive; whereas if markets are not very competitive to begin with, then switching costs make them even less competitive. In the above statements, by "competitive" I mean a market that is close to a symmetric duopoly or one where the sellers' discount factor is very high.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Luis Cabral, 2012. "Switching Costs and Equilibrium Prices," Working Papers 12-04, New York University, Leonard N. Stern School of Business, Department of Economics.
    • Handle: RePEc:ste:nystbu:12-04
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    File URL: http://w4.stern.nyu.edu/economics/docs/workingpapers/2012/Cabral-SwitchingCostsandEquilibriumPrices_Mar2012.pdf
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    References listed on IDEAS

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    1. Kenneth S. Corts, 1998. "Third-Degree Price Discrimination in Oligopoly: All-Out Competition and Strategic Commitment," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 306-323, Summer.
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    6. Andrew Rhodes, 2014. "Re-examining the effects of switching costs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(1), pages 161-194, September.
    7. Jason Pearcy, 2016. "Bargains Followed by Bargains: When Switching Costs Make Markets More Competitive," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 25(4), pages 826-851, December.
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    10. Toker Doganoglu, 2010. "Switching costs, experience goods and dynamic price competition," Quantitative Marketing and Economics (QME), Springer, vol. 8(2), pages 167-205, June.
    11. Biglaiser, Gary & Crémer, Jacques & Dobos, Gergely, 2013. "The value of switching costs," Journal of Economic Theory, Elsevier, vol. 148(3), pages 935-952.
    12. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 375-394.
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    14. J. Miguel Villas‐Boas, 2006. "Dynamic Competition with Experience Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 37-66, March.
    15. V. Brian Viard, 2007. "Do switching costs make markets more or less competitive? The case of 800-number portability," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 146-163, March.
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    Cited by:

    1. Natalia Fabra & Alfredo García, 2015. "Dynamic Price Competition with Switching Costs," Dynamic Games and Applications, Springer, vol. 5(4), pages 540-567, December.
    2. Fabra, Natalia & García, Alfredo, 2015. "Market structure and the competitive effects of switching costs," Economics Letters, Elsevier, vol. 126(C), pages 150-155.
    3. David Byrne & Brian K. Kovak & Ryan Michaels, 2013. "Price and Quality Dispersion in an Offshoring Market: Evidence from Semiconductor Production Services," NBER Working Papers 19637, National Bureau of Economic Research, Inc.
    4. Wilson, Chris M, 2009. "Market Frictions: A Unified Model of Search and Switching Costs," MPRA Paper 13672, University Library of Munich, Germany.

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    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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